World interest rate=5% Consider the following indefinitely living economy: Initial external wealth position = -100 Natural...

  

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World interest rate=5% Consider the following indefinitely living economy: Initial external wealth position = -100 Natural level of Production Q= 150 Round any number off to 3 decimal places There is a shock to production which lowers output by 100 in period 2. After period 2 Output is back to the normal level for all subsequent periods. a) Please calculate the level of consumption, the Trade Balance for period 0 through 5 and the PV of production and consumption for an indefinitely living Economy that decided in period 0 to move from an open to a closed Economy not considering the output shock in t=2. (Hint: What happens to the negative initial external wealth? Don't forget to account for the PV of this external negative wealth, Look at the LRBC in PV form). (5) b) Please calculate the level of consumption, the Trade Balance for period 0 through 5 and the PV of production and consumption for an indefinitely living Economy that decided in period 0 to move from an open to a closed Economy now considering the shock to production in t=2. (5) c) Please calculate the level of consumption, the Trade Balance for period 0 through 5 and the PV of production and consumption for an indefinitely living open Economy considering the output shock in t=2. When does the economy adjust consumption to smooth consumption? How does the initial negative external wealth effect the consumption path? (7.5) d) Discuss the outcome in a) and b) What is the benefit of financial globalization in this case? (min 5 sentences). What is the negative external wealth in each period? (7.5) World interest rate=5% Consider the following indefinitely living economy: Initial external wealth position = -100 Natural level of Production Q= 150 Round any number off to 3 decimal places There is a shock to production which lowers output by 100 in period 2. After period 2 Output is back to the normal level for all subsequent periods. a) Please calculate the level of consumption, the Trade Balance for period 0 through 5 and the PV of production and consumption for an indefinitely living Economy that decided in period 0 to move from an open to a closed Economy not considering the output shock in t=2. (Hint: What happens to the negative initial external wealth? Don't forget to account for the PV of this external negative wealth, Look at the LRBC in PV form). (5) b) Please calculate the level of consumption, the Trade Balance for period 0 through 5 and the PV of production and consumption for an indefinitely living Economy that decided in period 0 to move from an open to a closed Economy now considering the shock to production in t=2. (5) c) Please calculate the level of consumption, the Trade Balance for period 0 through 5 and the PV of production and consumption for an indefinitely living open Economy considering the output shock in t=2. When does the economy adjust consumption to smooth consumption? How does the initial negative external wealth effect the consumption path? (7.5) d) Discuss the outcome in a) and b) What is the benefit of financial globalization in this case? (min 5 sentences). What is the negative external wealth in each period? (7.5)